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What is a stock split? A stock split is a corporate action in which a company increases the number of its outstanding shares by dividing its existing shares into multiple shares. The purpose of a stock split is to make the shares more accessible and affordable to a broader range of investors. Although the total market value of the company remains the same before and after the split, the split affects the share price and the number of shares held by individual investors.
Here’s how a stock split typically works:
- Ratio: The company determines the ratio for the stock split, such as 2-for-1, 3-for-1, or any other proportion. For example, in a 2-for-1 stock split, each existing share is divided into two shares.
- Announcement: The company publicly announces the stock split, including the ratio and the effective date. This information is usually communicated through press releases or regulatory filings.
- Adjustment: On the effective date of the stock split, the company’s shares begin trading at the adjusted split price. The split price is calculated by dividing the previous closing price by the split ratio. As a result, the stock price per share decreases proportionally, making it more affordable for investors.
- Increased number of shares: After the stock split, each shareholder receives additional shares based on the split ratio. For example, if an investor held 100 shares before a 2-for-1 stock split, they would receive an additional 100 shares, resulting in a total of 200 shares. However, the ownership percentage remains the same.
- Impact on stock price: Following a stock split, the market price per share typically adjusts to reflect the new split price. For example, if the stock was trading at $100 per share before a 2-for-1 split, the stock price would adjust to $50 per share after the split. The split does not directly affect the overall value of the investor’s holdings.
The main benefits of a stock split are increased liquidity and improved affordability of shares, potentially attracting more investors. Additionally, a lower stock price can enhance trading activity and make the stock more attractive to retail investors.
It’s important to note that a stock split does not alter the fundamental value of the company or the total market capitalization. It is simply a division of existing shares to adjust the price and increase accessibility.
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